Delayed retirement reforms should not delay you reforming your retirement

The retirement reforms set to have taken effect on 1 March 2015 have been delayed, possibly until 2017 according to a report in the Business Day. While some segments will welcome the delay (unions and high income earners in particular), National Treasury’s potential capitulation may undermine its entire reform initiative.

The key objective of these proposals (in their entirety) is to strengthen retirement savings. More specifically, National Treasury (NT) wants to ensure that our “retirement system serves the needs of South Africans better and more fairly than in the past, and as efficiently as possible, by providing more appropriate products.”

How does this delay affect me?

Delaying these initiatives means that fund members will continue to suffer a system that is not fair, does not serve their needs and does not provide appropriate products.

But as fund trustee, employer or fund member, you should not wait for these reforms to be passed, to do the right thing. The bottom line is that we have no certainty now as to when reforms will happen and what their scope will be. But we can be sure that the reforms will not legislate against any of the key principles established in the original discussion papers.

10X supports NT’s objectives to give fund members better value for their retirement savings and achieve better outcomes. NT has already identified the numerous challenges on this road: excessive choice, complicated products, conflicted advice, high fees and opaque reporting. But we can also address these issues without NT’s further guidance.

What can I do to ensure a secure retirement?

What we most definitely should not do is rely on the retirement fund industry to remove these challenges as they create and benefit from them. The wealth enjoyed by the retirement fund industry – evident in its fancy buildings, flash marketing and highly-paid employees – is funded entirely by fund members’ savings, and directly reduces their pension.

Implement a successful retirement plan

The good news is that it is fairly easy to implement a successful retirement plan, one that serves retirement fund savers rather than the industry. But before we share this formula, you need to agree to our Terms & Conditions, our so-called ground rules.

  1. Patience: Saving for retirement is an endurance sport. You may save for 40 years (a working life) and then invest in a living annuity at retirement for another 20 years plus. You need patience and long-term perspective to be successful. Learn more about our new Living Annuity product.
  2. Precision: Small mistakes snowball into huge mistakes over 40 years and become even more debilitating over 60 years. Do not be deceived by the simplicity of the successful retirement formula. You need to be precise in your approach as even a small, persistent deviation can cause you to miss your goal by the proverbial country-mile.
  3. Discipline: Avoid the numerous temptations along the way. This is the hardest test. Who does not prefer the hottest fund over their current one? And who does not lose confidence when equity markets fall (as they are doing now)? Ensure that you have the right strategy then stick with it through good times and bad. That is why we set a strategy in the first place, to retain our bearings during difficult times, confident that this will ultimately lead to a better outcome – if it won’t, it is not the right strategy.

We can define the variables of a successful retirement plan.

Retirement Formula: Four steps to retirement success

  1. Savings amount: 15% of salary. Save 15% of your total salary, after fees and insurance deductions.
  2. Savings period: 40 years. Save from your first pay check to your last. Preserve your savings when you change jobs – never cash in!
  3. Investment growth: Target a return of CPI +6% per year before fees, in a high equity tracker (index) fund. Investing in a high equity fund ensures you earn a high long-term return. Using a tracker fund ensures you earn the market return at a low cost, which outperforms most active funds. It will also spare you the impossible job of trying to understand every fund manager’s “unique” investment strategy, and selecting, monitoring and firing fund managers and investment consultants. Avoid the high fee low return approach, even against the insistence of highly paid investment “professionals”.
  4. Total fees: 1% or less. Minimise your fees where possible. The larger your fund the greater your bargaining power. Make sure you understand every fee incurred and how these reduce your savings outcome and living annuity retirement income. Demand full transparency on every member benefit statement. Stop accepting the excuse that fees are not disclosed because it is “too hard”. Does your company demand invoices from its suppliers, or does it give them direct access to its bank account, to take what they want?

Find out if you are saving enough with our Retirement Calculator.

100% success rate

10X’s strategy targets a minimum 60% replacement ratio – a pension that replaces at least 60% of your final salary to ensure you can maintain an adequate living standard in retirement. It does not need to be 100% as you will no longer spend 15% saving for retirement, the mortgage should be paid down (with the potential to downsize) and your children should stand on their own feet by then.

Following our simple retirement formula, you would have achieved this retirement goal in every 40-year savings period since 1900. In fact, as the graph below shows, the average replacement ratio would have been 90%. Even the worst 40-year period (the worst return from a high equity portfolio) produced a 63% replacement ratio, which is still adequate. This demonstrates the importance of managing investment risk in the context of your objective and time horizon: this strategy worked even during the worst of times, but only if you maintained your discipline during this time and did not abandon equities, even after a prolonged period of poor returns. Incidentally, the best 40-year period generated a 132% replacement ratio, which is a substantial lifestyle gain in retirement.

Unfortunately, very few people achieve these results as very few people save the 10X way. Rather, they invest with active managers (losing around 1% pa return on average), change funds after poor returns (losing another 1% pa in returns) and pay high fees (losing yet another 1% pa).

How do high fees impact my outcome?

To be generous, let us assume that the average saver only loses 2% per year (not 3%). The results are shown in the orange bar. On average these savers replace only 55% of their final salary, so most miss their minimum retirement goal, which underlines the important of being precise: a few seemingly innocent errors compound to destroy huge value for long term investors.

Irrespective of whether you are a retirement fund trustee, employer or fund member, this is the most important financial chart you will ever see. It shows the value created by following a straight and precise investment path throughout your working life. And the value destroyed by following the meander proposed by the retirement fund industry, littered with choice, complex products, conflicted advice, high fees and opaque reporting.

Do we really need to wait on National Treasury’s regulations, to inform us which path to take?

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